what is Rentvesting and how does it work?

An increasingly common approach to property investing in recent years has been the concept of rentvesting. Rentvesting has become a more popular phenomenon as house prices continue to grow becoming more unaffordable for first home buyers. But what is rentvesting? Rentvesting is simply the fusion of  “renting” and “investing” and describes a new approach to housing ownership. The concept entails an individual who may rent where they want to live but purchase property elsewhere within their budget. This allows an individual to get into the housing market where they may have otherwise been unable to. But who should rent-vest and what are the pros and cons of this approach to investing?

Benefits to rent-vesting

From the outset, it may seem quite counter-productive as to why an individual would rent a property whilst still having a mortgage to pay off? Rentvesting provides people with the ability to get into the housing market even if it isn’t where they want to live. The major benefits to taking this approach can be seen as:

  • The individual can choose to live where they want and are not tied down by their owner-occupier mortgage.
  • It allows individuals who can’t afford to purchase in expensive areas but still live within that area. ‘
  • The interest on investment loans is tax-deductible whilst a principal place of residence (PPOR) loan is not.
  • Can increase savings if the rent is cheaper than the mortgage repayments in an area.
  • Rental income can be used to cover expenses of investment properties.
  • Can purchase in an area with greater upside to capital growth.

The age-old saying that rent money is dead money is not necessarily true today. Renting provides an individual with a key necessity that is housing in a location that isn’t limited by property prices. If an individual was to rent and not re-invest their additional savings, then it would seem relatively fruitless. However, rent-vesting flips the perception of renting on its head and can be seen to have numerous advantages if employed successfully.

Disadvantages to rent-vesting

There can be some disadvantages for the concept of rent-vesting which should be taken into consideration. Cons to utilising this idea can be seen as the following:

  • There is less security around living
  • The rent-vestor could be moving more frequently.
  • The individual wouldn’t be able to utilise government incentives such as first homeowner grants.
  • If the rent-vestor was to sell they would be liable to pay capital gains tax on any profits from their investment property. (After 12 months they would receive a 50% exception, unlike owner-occupiers who don’t pay capital gains tax).
  • There would be maintenance and ongoing costs to hold the investment property.
The verdict

Rentvesting can be a viable way for people to build their wealth whilst being able to live the lifestyle they want to live. Rentvesting has also been an extremely successful strategy for many property investors and is becoming a more common practice today. As house prices continue to rise it becomes more and more difficult for first home buyers to get into the market. Taking a rentvestor approach may be a feasible option for those that wish to enter the property market but lack the borrowing capacity to purchase where they live. Ultimately, the decision to employ this approach needs to be considered from a case-by-case basis focusing on the goals and ambitions of the individual over the short, medium, and long term.